Recent rent and home price growth may have narrowed the gap, but Sacramento continues to have lower housing prices than other major California cities, according to Moody’s CRE. While rent growth has slowed from pandemic highs, Sacramento real estate trends suggest the market is settling into more sustainable growth, Welch said. 

Moody’s CRE forecasts asking rents will rise 1.7% in 2024 as the Sacramento multifamily market absorbs new construction before settling into the 2.5% to 3.5%  range in the following years. 

Supply growth—but an ease ahead

The Sacramento multifamily market has seen a significant increase in construction in recent years. Nearly 2,000 additional units are expected by the end of the year, contributing to a 5.5% increase in inventory since the start of 2022, according to Moody’s CRE. 

Even with the increase in supply, Sacramento’s vacancy rate was a very tight 3.2% in the first quarter of 2024, according to Moody’s CRE. Sacramento’s largest submarket, North Sacramento, was even tighter, at 1.7%. 

Across the metro area, Moody’s CRE expects vacancies to rise only slightly to 3.3% by the end of the year. 

“The market has been absorbing the new supply,” Welch said. “There will be some more to work through over the next year, but after that the pipeline appears to be slowing.” 

Moody’s CRE forecasts about 1,700 additional new units in 2025, after which projected completions drop significantly. 

“Sacramento’s multifamily inventory and household formation will grow in lockstep, remaining strong this year and next before slowing down thereafter,” said Lu Chen, Director and Senior Economist at Moody’s CRE. “Relative affordability and normalization of return-to-office policies are tailwinds to support steady occupancy during this shift in market dynamics.” 

Rising expenses

Inflation is affecting property management expenses, and some items, such as insurance, are seeing particularly large jumps. 

Some cost increases aren’t altogether avoidable, Welch said. But closely monitoring expenses can help multifamily investors identify opportunities to lower costs within their control. For instance, switching to lower maintenance, drought-tolerant landscaping may require an upfront investment but reduce costs longer term, he said. 

“Even if you use a property manager, it may be worth spending time managing how they’re handling expenses,” he said.   

Higher-for-longer interest rates

Interest rates remain elevated as the Federal Reserve seeks more signs of progress on bringing inflation back to its 2% target. It’s one reason many Sacramento multifamily investors are taking a patient approach to evaluating potential new investments, Welch said. 

While the timeline for interest rate relief is uncertain, there are a few approaches that can make sense for multifamily investors seeking or refinancing apartment loans.

“Working closely with a lender can help you make sure you’re prepared to act quickly if an opportunity emerges,” Welch said. 

Investors may also want to explore options that offer flexibility if the rate environment changes, such as shorter terms or lower prepayment premiums, Welch said. 

“It can make sense to ensure you have the ability to refinance if conditions change,” he said.